Question

Question 3

EOQ, ORDERING COST, CARRYING COST, AND TOTAL INVENTORY RELATED COST (LO 3)

Franklin Company purchases 4,500 units of Widgelets each year in lots of 500 units per order. cost of placing one order is $22, and the cost of carrying one unit of product in inventory for a year is $8.80.

Required:

1 What is the EOQ for Widgelets?

2 How many orders for Widgelets will Franklin place per year under the EOQ policy?

3 What is the total annual ordering cost of Widgelets under the EOQ policy?

4 What is the total annual carrying cost of Widgelets under the EOQ policy?

5 What is the total annual cost of Franklin's inventory policy for Widgelets under the EOQ policy?

Answer 1

1)

Economic Order Quantity (EOQ)

= Sqrt (2 x A x O / C)

Where,

A = Annual demand = 4,500

O = Ordering cost per order = $22

C = Carrying cost per unit per annum = $8.80

So, EOQ

= Sqrt (2 x 4,500 x 22 / 8.80)

= Sqrt (22,500)

= 150 units

2)

Number of orders

= Annual demand / EOQ

= 4,500 / 150

= 30 orders

3)

Total annual ordering cost

= Number of orders x Ordering cost per order

= 30 x $22

= $660

4)

Annual carrying cost of average inventory

= EOQ / 2 x Carrying cost per unit per annum

= 150 / 2 x $8.80

= $660

5)

Total annual cost

= Ordering cost + Carrying cost

= $660 + $660

= $1,320